3.1.6 Institutional frameworks

Recent research has included studies on the role of institutions as a critical component in an economy’s capacity to use resources optimally (Ostrom, 1990; Ostrom et al., 2002) and interventions that alter institutional structure are among the most accepted solutions in recent times for shaping economic structure and its associated energy use and emissions. Three important aspects of institutional structure are:

1. The extent of centralization and participation in decisions.

2. The extent (spanning from local to global) and nature of decision mechanisms.

3. Processes for effective interventions (e.g. the mix of market and regulatory processes).

Institutional structures vary considerably across nations, even those with similar levels of economic development. Although no consensus exists on the desirability of a specific type of institutional framework, experience suggests that more participative processes help to build trust and social capital to better manage the environmental ‘commons’ (World Bank, 1992; Beierle and Cayford, 2002; Ostrom et al., 2002; Rydin, 2003). Other relevant developments may include greater use of market mechanisms and institutions to enhance global cooperation and more effectively manage global environmental issues (see also Chapter 12).

A weak institutional structure basically explains why an economy can be in a position that is significantly below the theoretically efficient production frontier, with several economists terming it as a ‘missing link’ in the production function (Meier, 2001). Furthermore, weak institutions also cause frictions in economic exchange processes, resulting in high transaction costs.

The existence of weak institutions in developing countries has implications for the capacity to adapt to or mitigate climate change. A review of the social capital literature and the implications for climate change mitigation policies concludes that successful implementation of GHG emission-reduction options will generally depend on additional measures to increase the potential market and the number of exchanges. This can involve strengthening the incentives for exchange (prices, capital markets, information efforts, etc.), introducing new actors (institutional and human capacity efforts), and reducing the risks of participating (legal framework, information, general policy context of market regulation). The measures all depend on the nature of the formal institutions, the social groups in society, and the interaction between them (see Chapter 2 and Halsnaes, 2002).

Some of the climate change policy recommendations that are inspired by institutional economics include general capacity-building programmes, and local enterprise and finance development, for example in the form of soft loans, in addition to educational and training programmes (Halsnaes, 2002, see also Chapters 2 and 12).

In today’s less industrialized regions, there is a large and relatively unskilled part of the population that is not yet involved in the formal economy. In many regions industrialization leads to wage differentials that draw these people into the more productive, formal economy, causing accelerated urbanization in the process. This is why labour force growth in these regions contributes significantly to GDP growth. The concerns relating to the informal economy are twofold:

1. Whether historical development patterns and relationships among key underlying variables will hold constant in the projections period.

2. Whether there are important feedbacks between the evolution of a particular sector and the overall development pattern that would affect GHG emissions (Shukla, 2005).

Social and cultural processes shape institutions and the way in which they function. Social norms of ownership and distribution have a vital influence on the structure of production and consumption, as well as the quality and extent of the social ‘infrastructure’ sectors, such as education, which are paramount to capacity building and technological progress. Unlike institutions, social and culture processes are often more inflexible and difficult to influence. However, specific sectors, such as education, are amenable to interventions. Barring some negative features, such as segregation, there is no consensus as to the interventions that are necessary or desirable to alter social and cultural processes. On the other hand, understanding their role is crucial for assessing the evolution of the social infrastructure that underpins technological progress and human welfare (Jung et al., 2000) as well as evolving perceptions and social understanding of climate change risk (see Rayner and Malone, 1998; Douglas and Wildavsky, 1982; Slovic, 2000).

While institutional arrangements are sometimes described as part of storylines, scenario specifications generally do not include explicit assumptions about them. The role of institutions in the implementation of development choices and its implications to climate change mitigation are discussed further in Section 12.2 of Chapter 12.